In Brazil

Silvia Izquierdo/Associated Press

I am in Brazil in part to attend and present at a conference on education.  I am learning a lot, including some misperceptions about what we know about some aspects of education reform.  I hope to blog about this this week.

In the meantime all the talk has been about the military take over of a favela in Rio.  Interestingly, the tactic (apparently the blueprint is Medellin in Colombia) is the same as the US in Iraq and Afghanistan: clear, hold and build.  The idea is to clear out the gangs and drug dealers, create permanent (or long-term) police stations and then build relationships through providing community services like health clinics.  These favela are almost stateless places within Brazil, ungoverned by the state but governed by criminal gangs.  Interesting.

Ironically, the very best real estate in Rio aside from beachfront property belongs to the favelas.  The city prohibited official building up the hillsides to preserve the natural environment but had insufficient resources to deal with the illegal building that eventually became essentially permanent neighborhoods: slums with million dollar views.  Ah Brazil.

Not to gloat, but the São Paulo weather has been fabulous: sunny and in the 70s (okay, yes, to gloat).  The last two days have seen tremendous tropical rain storms that last about 30 minutes but absolutely drench the city (including me today).  Here is a picture of the sun to warm yourself by taken from my apartment balcony.  No I am not rich - the research center provides the apartment.

Unlike last time I was here when a dollar bought about 3.5 Reais, the exchange rate is down to 1.6 and São Paulo is EXPENSIVE!  My meal last night with two beers and plate of Picadinho was $60!  Ouch.

Ciao.

Happy Thanksgiving and Scheduling Notes

I am taking the week off blogging this week (I have to recover from the shocking Arsenal loss to that other North London club that shall not be named) and then will be traveling to São Paulo, Brazil for research and a conference on Saturday. I will be there until the follow ing Monday.  I will try to do some Brazil blogging while there.

Ill tweet anything particularly relevant and will try and tweet from Brazil.

Happy Thanksgiving!

Friday Omnibus Post

I have been traveling and thus have a bit of catching up to do.  So today I'll mostly direct you elsewhere for your fill-up of all things Oregon and Economic.

While I was away the state released its unemployment data for October:  The news is good, though the unemployment rate is stuck at 10.5%, the state added a very healthy 7,600 jobs in October.  This mimics the good national number for October.

On the New York Times' Economix blog, Ed Glaeser has a nice post on why economics helps a lot on the how questions in policy but not as much on the what. It reminds me of the astonished look I got from a thoughtful econ major at OSU when I said there is a point at which economics stops and has no answers to moral questions like how much poverty is acceptable and does a society have an obligation to help the disadvantaged.  Once a society decides that it will help the poor, economics is good at helping design effective and efficient programs but can't give you an answer to the basic question.

In the Wall Steet Journal, David Wessel interprets Ben Bernanke's speech today in Germany.

And now, the picture of the day:

Do Better Students Make Better Teachers?

The Oregonian/Jim Springhetti

On Sunday, The Oregonian published a massively long op-ed piece by two McKinsey consultants arguing that the US has a big problem in the fact that out very top students are not going into teaching (K-12).  They spend a long time describing how poor the US is at attracting top college students to go into teaching relative to other countries that have top performing education systems.  They spend a long time discussing the ways that the US could go about fixing this problem and how it is not a daunting as it seems.

But throughout the entire article is the assumption, left unexamined until the last paragraph despite its massive length, that better students make better teachers.  The problem with this is that the answer appears to be no.

Here is a passage from a New York Times Magazine article on what makes a good teacher:

But what makes a good teacher? There have been many quests for the one essential trait, and they have all come up empty-handed. Among the factors that do not predict whether a teacher will succeed: a graduate-school degree, a high score on the SAT, an extroverted personality, politeness, confidence, warmth, enthusiasm and having passed the teacher-certification exam on the first try.

This is a pretty good summary of the (good) evidence: things that we can observe about teachers (where they went to school, their certifications, their academic success) are not good predictors of being effective teachers in the classroom.

Particularly gauling is the last paragraph of the Oregonian Op-Ed which finally gets around to trying to make the case that recruiting better students is critical to improve educational performance:

Some U.S. researchers say there's little evidence that teachers with stronger academic backgrounds produce higher student achievement, but this conclusion is starkly at odds with the experiences of Singapore, Finland and South Korea. Our McKinsey colleagues have studied more than 50 school systems around the world and have never seen a nation achieve or sustain world-class educational performance without drawing its teachers from the top third of their class. Should we really bet our children's future on the possibility that our country might be the exception?

Er...those 'some U.S. researchers' are the ones that very carefully try and isolate the causal link.  Unlike McKinsey and Co. that appears to have no concept of the problem confusing correlation with causality.  We don't know the counterfactual and cannot, I repeat, CANNOT make any causal statement about the effectiveness of teachers from this observed correlation.  

Okay now that I have vented, what interests me even more than the bad scholarship is the essential question this raises: do we really want our best and brightest becoming K-12 teachers?  I am not sure it takes a person with an amazing aptitude for astro-physics to teach a second grader how to add.  I think I'd rather have the astro-physics prodigy go off and do astro-physics.  Or a talented biologist teaching kids about chrysalis instead of finding a cure for cancer.  Or a exceptional engineer teaching Phys. Ed. rather than solving the energy problem.   In other words, rather than viewing the current state of affairs in US education as a failure, it is quite possible that this represents a strength of how free labor markets are in the country.  Perhaps we have the comparative advantage equation all figured out - channeling talent where it is relatively most effective (okay, if we ignore investment bankers).

This is likely to be seen as provocative, but as an economist I don't see it that way, when I think about my own kids, I am not sure it matters to me if their grade school teachers scored 800 on the math section of the SAT, but it matter a lot to me if they can connect with students, adjust to their different needs and inspire them.  And, by the way, I am the son of a public high school english teacher who went to Stanford and is pretty damn smart, so I am not dismissing intelligence, rather making a case for other attributes that may matter as much or more.

And the every widening skill premium accounts for some of what has been the declining relative pay for teachers.  With all the productivity enhancing technology out in the world the difference between productivity in areas where technology makes a big impact and areas where it doesn't (teaching) means that relative returns are going to diverge (see: cost disease).  This is true for my profession as well - economists in the private sector have wage gains that far exceed those of us that chose education.

By the way, that NY Times Magazine article is about whether we can make good and effective teachers or are some people just born to be good and we can't do much.  It is very interesting and I don't know the answer, but I suspect that both are important.  Good training can make anyone better but some have a knack and some don't.  Which again to an economist is not a mark of shame, but simply a skill/requirement mismatch.

This is the lesson of comparative advantage: we are all relatively good at something.

Portland Public Schools' Bond Measure

I largely agree with the spin PPS is putting on its proposed $548 million bond measure: investments in schools are good for economies, communities and property values.

But I have one question: nowhere in the coverage of this proposal have I heard a single thing about what I have been assuming is the number one priority in terms of PPS's facilities need - making sure that most school buildings don't fall down upon Portland's children when the big earthquake hits - so what gives?

From academic literature we know that making schools fancier is not going to help student performance substantially other than perhaps attracting and keeping good students (peer effects are huge).  So, if I am thinking about priorities, the fact that we are due for a major earthquake that could cause devastating structural failures makes me think I would rather ensure kids safety first.

The fact that this is not being mentioned at all makes me suspect that PPS does not want to have this discussion at the same time.  But they should.  It is all about marginal benefit and marginal cost.

Dumb and Dumber Public Policy: Portland's Leaf Fee

Roger Jensen/The Oregonian

In this recessed economy municipalities are struggling with diminished revenue in the same way states are. It is becoming harder and harder for them to provide the same services in this new economic reality. So many cities are looking for new ways to impose fees for services that were once funded with general revenues. Portland is no different.

And so the mayor saw the big wad of money spent on fall feaf removal as an opportunity to raise new revenue by imposing a leaf cleanup fee for the neighborhoods where the cleanup occurs. The problem with this tactic is twofold: charging specific fees for public goods is dumb public policy, and ironically, allowing households to opt-out actually makes it dumber.

To properly frame the policy we should begin by discussing public goods and to properly discuss public goods we can start by asking the question: why does government provide things like roads, parks and fire departments?  The answer should be clear to anyone who has had even the most basic economics education: these things are public goods - they have elements of non-rivalry (one persons's consumption does not leave less for another) and non-excludability (you cannot prevent people from consuming).  City parks are a clear example, you cannot prevent people from using them and if I stroll through a park, there is plenty left for the next person.  The moral of public goods is that given these two elements, private provision of them is always going to be inadequate relative to what is optional and so government steps in to correct this market failure.   

Roads are also public goods - especially city roads.  Yes, I use the road on which my house is situated more than the average Portland resident, but I rely on the entire network of Portland's roads to walk, bike and drive and to keep traffic evenly spread throughout the city.  This is why the network of safe and well-maintained roads is the city government's responsibility and a big part of what my taxes pay for.  So while the leaves that my and my neighbors trees deposit on the street may seem like and obvious thing to charge us for, the benefit of clearing them from the street accrues to everyone.  Streets free from leaves are safer for anyone who travels on them and also prevents clogging up the city's sewer system that we are all responsible for.

The logic of why we don't leave street maintenance up to individual neighborhoods is obvious.  One neighborhood's decision to spend less and degrade their streets imposes a cost to local residents in terms of bad roads to traverse to get to and from home, but it also imposes a cost to the the rest of the city. Of course a cost is imposed on those who travel through the neighborhood, but also in terms of displaced traffic from those who avoid the neighborhood and thus cause congestion and additional wear and tear on other neighborhoods' streets - a classic externality problem.

Using the same logic of the leaf fee removal program leads to plenty of other absurd policy options.  We could charge an extra police fee to residents of high-crime neighborhoods.  Or we could impose a park fee for those that live within two blocks of a park.  [As an aside, we already pay for this in the differential values of our homes though Measures 5 and 50 have de-linked taxes with market values but the historical value remains the basis of the tax assessment]  Clearly, these are absurd suggestions, crime affects us all, we all enjoy parks, etc.

So the leaf fee policy is dumb, but the opt-out actually makes it dumber.  You see, since the leaf fee can be avoided be cleaning up the street in front of your property yourself, this creates a dis-incentive to have and maintain street trees - something the city is actively promoting (the water bureau Environmental Services bureau even has, or had, a program by which they gave you a $50 credit for planting a tree).  It is also not going to be very good for neighbor relations - what if I sweep my leaves over in front of my neighbors house?  What if I have no trees, but by neighbor's trees drop tons of leaves on my part of the street? In fact, I think perhaps each block should pool and every house but one sweeps their leaves in front of one house and everyone chips in to play that house's leaf fee.  You can see how this program creates perverse incentives.   

I understand the cities desire to find new revenue to help support its services, but this policy is just plain dumb.

Remembrance Day

I know this is anglo-phyllic and all, remarking on Remembrance Day and not Veterans Day, but my grandfather was in the RAF in WWII, crashed in North Africa, shattered both legs and was hobbled for the rest of his life. His presence in my life, and his constant suffering and struggle with his injuries and the mental scars, was the one real and personal connection to the war for me, and a small testament to the sacrifice that his generation made for subsequent ones like mine.  That he recently died serves as a reminder that his generation is dwindling and that we must therefore be the keepers of their memories.

My uncle, a Canadian whose regiment was thus under British command, was killed in Normandy.  He died as a result of wounds suffered in the D-Day invasion of Juno beach.  He is buried in Calvados, France.

And so today I remember their sacrifice and give thanks.

Oregon's Exports and Currency Manipuation

Rich Read has a very nice article in today's Oregonian about the healthy uptick in Oregon's exports.  This is what I have been telling reporters for some time now, the silver lining for Oregon is the very healthy growth happening in East Asia, particularly China.  The trend highlighted by Read suggests that though Oregon is one of the harder hit states in this recession, we might have an earlier and healthier rebound than other states.

But this brings up a fascinating global debate right now about countries and their currencies and how currency manipulation can lead to unfair trade advantages.

To make is as clear as possible let's get a few preliminaries out of the way.  Exchange rates determine the cost of imports in a country.  So if the dollar goes up relative to other foreign currencies imports become cheaper for US consumers.  At the same time exports become more expensive.  As we import a lot of what we consume, the overall welfare affect of currency movements is not clear: a cheaper dollar helps US exporters, but makes imported inputs (like rare earths for example), and final goods consumption more expensive.

The US is currently putting pressure on China to stop actively keeping the value of its currency low so that US exports to China will become more affordable to the 1.2 billion Chinese consumers that are quickly getting real buying power.  Doing so will make Chinese imports to the US more expensive, so that iPhone you want may raise in price should this happen.

What will happen to Oregon is not exactly clear.  We export a lot of raw materials and inputs (like computer chips) to China where they are turned into finished consumer goods and sent back here.  So the inputs will become cheaper to Chinese manufacturers but the final good will become more expensive.  The value added in China will increase so overall one would expect a decrease in demand for these goods in the US.  But this is almost surely to be countered by the increase in demand for these same products in China.

Of course, the US is now facing similar criticisms for its policy of quantitative easing.  By printing new money, you increase the global supply of dollars and this will cause the dollar to fall relative to other currencies.  So is this unfair manipulation?  Now you see why it is so hard to write rules about this in the context of the WTO.  The Obama administration makes the point (very valid in my view) that a strong rebound of the US economy would more than make up for the devaluation.  We are the world's biggest importer and the biggest market for most of the world's export goods.  Getting US consumers back in the game is probably the first order of priority.  

So, in the end I don't think Chinese currency manipulation is that big a deal for Oregon in the short-run given the nature of what we ship over there, but could have significant impacts in the long-run.  If Chinese consumers suddenly had increased buying power for consumer electronics then this would help Intel for example.  And I don't think that the temporary quantitative easing is a big deal either in terms of global trade.  The key distinction in my mind is the short-term manipulation for a clear policy goal of the US versus the systematic long-term manipulation of the Chinese.  The former is not a problem, but the latter cannot go on forever.

Soccernomics: Dumping

The Scot Thompson announcement go me thinking again about the Timbers and some of the economic decisions they have been making.  One thing that has interested me ever since the crest fiasco is what the Timbers would do with all of the launch merchandise.

A little background for the uninitiated: the Timbers, with much fanfare, unveiled their new logo this past summer.  Unfortunately, they had not kept the Timbers Army (TA) in the loop and the Army, the Timbers supporters group, hated it and let their hate be known loudly and clearly.

The Timbers, to their credit, quickly met with the Army and made some subtle but significant changes to the logo.  I have posted the before and after above.

Of course, in anticipation of the launch, the Timbers ordered an avalanche of merchandise.  And why not, it doesn't have a sell-by date, so making sure you have enough on hand is important.  Ex post, however, they had a real conundrum: tons of suddenly obsolete merchandise waiting to be sold.

I assumed that they would just eat the loss and that soon poor people across Africa would suddenly be wearing the original Timbers logo along with their new Texas Rangers World Series Champions gear.  But no, the Timbers apparently decided that the changes they made were small enough that the original merchandise was just fine.  So they kept on selling it (without any disclaimer) on their web-site and in stores like Sports Authority.

At first this might have been because they didn't have updated merchandise to replace it, but now, it is well clear that they intend to get whatever money they can for the original stuff and withhold the new stuff until they are able to offload as much as the old stuff as they can.

I say this because I watched new logo merchandise slowly creep in to their on-line store alongside the old stuff, but it was never exactly replacement merchandise.  Then, all of a sudden, all of the new logo stuff was completely removed and they are currently only selling the original logo stuff, but now at a deep discount.  One suspects that they are trying for one last push to get the old stuff out the door before they dump it completely.

I got a t-shirt for the boy about a week before the new logo was released.  The Timbers store told me they would gladly exchange the shirt once new logo shirts were in.  They expected them months ago and I suspect they have had them that long.  For us it is a moot point, they boy likes and has already practically worn out the shirt.  

As an economist I have no problem with the strategy save for the part where they don't explicitly explain to the punters what they are buying.  The market can decide how much the original stuff is worth, and it is worth something, but in order to do so, full information is necessary.   I also don't like the holding back of the new stuff so that people like me can't or don't bother to exchange.  Seems a little nickel and dime.

I find it curious that they wouldn't just dump it all and start fresh, however, diluting the marketplace with an old brand is odd I think given the magnitude of the investment in what they hope will be a long running brand in Portland.  But then, the Timbers have shown themselves to be shrewd businesspeople and so I reserve judgement. I don't know if there is a blueprint for this type of thing, but I have to admit it smacks just a little bit of greed.  I mean, how much money could we really be talking about?  Is it really worth it in the long run?

A Class Act

Scot (with one T ;-) ) Thompson announced yesterday that he was retiring.  Read Geoffrey Arnold's nice article about Scot to get a sense of his background and who he is as a person.  I can add to this personally as a father of a son who has participated in a Timbers soccer camp Scot ran.  Scot was gracious, warm, engaging and great with the kids.  And while the other players there were good spirits, you could tell their hearts were not totally into hosting a bunch of kids for a day.  Scot, by contrast, really made the extra effort, seemed genuinely enthusiastic about having the kids around, and you could see the kids respond immediately to his enthusiasm and warmth.  I left with a decent impression of the Timbers but with a fantastic impression of Scot.

If the Timbers have any sense at all, they will make sure Scot stays a part of the organization, he is a class act.

High Unemployment Cyclical not Structural

Or so says the SF Fed:

An increase in U.S. aggregate labor demand reflected in rising job vacancies has not been accompanied by a similar decline in the unemployment rate. Some analysts maintain that unemployed workers lack the skills to fill available jobs, a mismatch that contributes to an elevated level of structural unemployment. However, analysis of data on employment growth and jobless rates across industries, occupations, and states suggests only a limited increase in structural unemployment, indicating that cyclical factors account for most of the rise in the unemployment rate.

Not really news to those who follow economics blogs where the point has been repeatedly made that if there is a mismatch of skills we should see some industries where wages are increasing rapidly as firms have to bid for scarce skills and other industries wages decline as there are too many workers with redundant skills. The evidence for this is just not there.

Which is good news in a way, there is no reason employment can't recover fully except for the fact that our consumers are seriously de-leveraging and we may not see the same level of consumer spending for a while.

Gold, Gold, Gold

Gold.  Look at it ... its ... golden.  Shiny, heavy and ... real ... unlike money which is all a shared illusion.  When the real collapse of the global economy comes, people will laugh at your worthless dollars but rob you of your gold!  So buy gold now!  Hurry!

See, the fundamentals of gold are can't miss:

And now, even people as serious as the president of the World Bank are becoming gold bugs and arguing for a return to the gold standard:

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

In fact, right now with the Fed creating money left and right people are starting to worry about how their wealth could rise or fall dramatically with the whims of the econo-bureaucrats in Washington. Gold, it is thought, takes the human element out of the equation - anchor our money to something real and tangible, the argument goes, and never again will you have to worry about ... anything.

So why not? Well, Martin Wolf does a good job of explaining:

...the obvious form of a contemporary gold standard would be a direct link between base money and gold. Base money — the note issue, plus reserves of commercial banks at the central bank (if any such institution survives) — would be 100 per cent gold-backed. The central bank would then become a currency board in gold, with the unit of account (the dollar, say) defined in terms of a given weight of gold.

In a less rigid version of such a system, the central bank might keep an excess gold reserve, which would allow it to act as lender of last resort to the financial system in times of crisis. That is how the Bank of England behaved during the 19th century, as explained by Walter Bagehot in his classic book, Lombard Street.

So what would be the objections to such a system? There are three: difficulties with the transition; instability; and lack of credibility.

The biggest transition problem is the mismatch between the value of official gold holdings and the size of the monetary system. The value of gold held by central banks is apparently about $1,300bn, while global deposits of the banking system were about $61,000bn in 2008, according to the McKinsey Global Institute. To survive the slightest financial panic, the ratio of gold to bank money would need to be perhaps an order of magnitude higher.

One obvious objection is that this would generate huge windfall gains to holders of gold. More important, if policymakers set this initial price wrong, as they certainly would, they could unleash either deflation or inflation: the latter is far more likely, in fact, because private holders would start selling their gold to the central banks at such a high price. Apparently, about 90 per cent of gold is now privately held. So the expansion in the monetary base could be enormous.

Moreover, gold reserves are distributed quite erratically around the world. So some currencies would have to experience inflation and others severe deflation. A similar problem explains why it was impossible to recreate the gold standard after the First World War: too much of the world’s gold reserves were then held by the US.

What, then, about the problems of the steady state? One obvious point is that we would be back to the world in which the balance of payments would be settled by physical shipment of gold or, as it was later, by movements within central bank vaults. That would, at the least, be absurd.

A far more important problem is that of financial stability. Economists of the Austrian school wish to abolish fractional reserve banking. But we know that this is a natural consequence of market forces. It is wasteful to hold a 100 per cent reserve in a bank, if depositors do not need their money almost all of the time. Banks have a strong incentive to lend some of the money deposited with them, so expanding the aggregate supply of money and credit.

The government might seek to impose narrow banking: banks would have to back any deposits with notes or reserves at the central bank. But entrepreneurs could then create quasi-banks (let us call them “shadow banks”). These would hold deposits in the safe narrow banks and offer higher returns to customers, because they lend out surplus reserves for profit.

Such a system is unstable. In good times, credit, deposit money and the ratio of deposit money to the monetary base expands. In bad times, this pyramid collapses. The result is financial crises, as happened repeatedly in the 19th century. To prevent this one would have to move into the world of limited purpose banking recommended by Larry Kotlikoff, in which no financial institution would be allowed to promise redemption at par unless it held matching assets.* If so, the pure gold standard would require abandonment of the current banking system altogether.

A further danger is that the response to all shocks would have to come via nominal wage and price flexibility. A less obvious point is that the gold standard does not guarantee price stability. Depending on the supply conditions for gold, the price level might move up or down. In the long-run, however, the price level would probably tend to fall (because the supply of gold fails to keep pace with global activity). Such a world of trend deflation is liable to depressions if or when the equilibrium real rate of interest is less than the rate of deflation.

Another and, in my view, even more serious, threat to the stability of any gold standard regime is international. A peg to gold may prove radically destabilising for any currency if other significant countries failed to sustain domestic monetary and financial stability. There could then be floods of gold into or out of a currency that is well managed. The monetary and financial consequences could be dramatic, with severe deflation one obvious threat. This is precisely what happened in the interwar years, with the chaos emanating mainly from the US.

Finally, there is the fundamental problem of credibility - or rather lack of it. As Bennett McCallum of Carnegie Mellon University also notes in the Cato Journal, the forces that now demand inflation from time-to-time would demand a change in the gold weight of the currency as happened in the 1930s. “Historically”, he notes, “the gold standard provided a reasonable degree of price level stability over long spans of time because the population at large had at that time a semi-religious belief that the price of gold should not be varied but should be maintained ‘forever’.”

That faith has perished. Moreover, everybody knows it has perished. So whenever the economy was in difficulty, the only question would be how soon the gold price would be changed or the link abandoned.

The fact is that gold is no different than any other commodity - subject to the whims of the market. And especially so since it has little real use to most of its holders. When people worry about the value of their dollars they convert to gold and the price is driven up, but when things settle down the price will fall. There is nothing magic about gold other than it is shiny and rare.  Its historical hold on our collective human psyche is impressive though.

And now time to repost a classic:

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Prescott Financial Sells Gold, Women & Sheep
http://www.colbertnation.com/
Colbert Report Full Episodes Political Humor U.S. Speedskating

Picture of the Day: Jobs

What do you make of this picture?  Strong overall trend toward recovery and growth or a recovery that has seriously faltered?  This picture is from the NY Times' Economix blog, go here for Leonhardt's interesting discussion.

US Unemployment: Rate Unchanged in October but...

The US economy added a very surprising 151,000 new jobs in October, much higher than most economists expected.  The rate was unchanged at 9.6% but this is not surprising.  Let's suppose that we can sustain this kind of job growth, many people who have been waiting out the recession will be induced to rejoin the labor force to look for a job.  Thus both the supply of jobs and the demand for the jobs increases.  So, right now, the number you should focus on is the new jobs number.

In fact, the news in even better when you consider that the government sector shed 8,000 jobs so the private sector job growth was 159,000.  This is almost startlingly robust.  Still, there are plenty of bad things to point out: the U6 rate which includes underemployed and discouraged workers is still at 17% and the number of long-term unemployed (for a year or more) keeps increasing rapidly.

One interesting question is whether this suddenly makes QE2 unnecessary and dangerous.  After all the main argument against QE2 is sparking uncontrolled inflation and the core mechanism of stubborn inflation is wages.  But as David Leonhardt points out wages are not keeping pace with productivity gains at the moment, so it is hard to see were inflation is getting traction.

Trees and Crime: Correlation and Causation, Part 652

Once again I am moved to post on my favorite bugaboo: mistaking correlation with causation.  This time the subject is a study of the affect of neighborhood trees on crime in Portland that The Oregonian reports on in today's paper.  Part of my problem is with the study itself but part of my problem is fundamental mistakes in the way it has been reported on by The O.

Let's start with an excerpt of the abstract of the study (which was authored by two Forest Service employees):

In general, the authors find that trees in the public right of way are associated with lower crime rates. The relationship between crime and trees on a house’s lot is mixed. Smaller, view­obstructing trees are associ­ ated with increased crime, whereas larger trees are associated with reduced crime. The authors speculate that trees may reduce crime by signaling to potential criminals that a house is better cared for and, therefore, subject to more effective authority than a comparable house with fewer trees.

This is all fair enough, the study looks at the correlation between trees and crime controlling for a host of other observables. They find some statistically significant correlations and are careful in the abstract not to make a causal statement. Yes, there are reasons to expect that trees signal greater police and neighbor vigiliance (think the broken windows theory) and thus asct as a deterrent to crime. But there are a host of other reasons to think that areas with higher crime might be associated with lower income, shorter tenancies and thus lower investment in trees so the true causal realtionshiop is far from clear.  In simpler terms, in high crime areas, the crime might be a disincentive to invest in the planting and upkeep of trees, in which case the causality runs in the other direction.

Unfortunately the authors do nothing to try and uncover the true causal link, and so all they can do is talk about correlations and speculate as to the causal story as the abstract illustrates. To this extent they are honest. The title of the study is a big problem however: "The Effect of Trees on Crime in Portland, Oregon." This is simply inaccurate, this is not a paper about the effect of trees on crime (a causal statement), it is about the association of trees and crime.

Perhaps this is the root of the problem with the reporting then. Here are three snippets from the article in The O.

1) The title of The Oregonian article (this is the web version): Tall trees help protect houses from crime, says study conducted in Southeast Portland

Uh, no.

2) "Houses with tall trees had less crime because trees made the area look more desirable."

Uh, no (this doesn't even get their speculative story right - if an area is more desirable, why isn't it more desirable to criminals too?)

3) "Street trees, a bigger tree canopy and more trees were all associated with less crime." [Italics mine]

Ah, yes, yes, yes! Do you see the crucial difference in the third statement from the first two?

Now this association is interesting in its own right, so that is not a problem, but you have to be very careful about crossing over from correlation to causation.

Class dismissed.

Is the Social Security Trust Fund Real or Imagined?

Groan...why must The Oregonian publish such nonsense?  The other day in an Op-Ed, Lewis and Clark law professor Tung Yin (one wonders why a lawyer is considered an expert on these things) makes the tired claim that since the Social Security trust fund is invested in Treasury securities, it doesn't really exist, it is all just a shell game.

Except for the rather annoying fact that treasuries are legal contracts backed by the full faith and credit of the US government.  Whether the government of China, the Social Security trust fund or a US citizen like me holds it is irrelevant.  A default on its debt is a default no matter who holds the securities.  Defaulting on obligation is simply not an option for the US, unless it wants the entire economy to go kablooey, and so there is no reason at all to view this as some elaborate shell game.

The fact that the US government is in deficit is a separate issue and only confuses the discussion of Social Security.  In time, once the reality of the earnings power of the current working age adults is known and the trust fund is on the verge of running out there will be three options: raise the tax, means-test benefits, and/or raise the retirement age.  Probably some combination of all three will end up being the solution (or at least the last two), but it is not a terribly hard problem to solve.  Just look at France.

And, by the way, foreign governments own a bunch of US debt (a little over a quarter), but the vast majority of the US debt is owed to...ourselves.  So while US debt is an obligation of the government it also represents income to all who own it.

They Might be Giants

I have to admit, I was expecting defeat - the offensive juggernaut that was the Rangers leading into the series seemed to me unstoppable.  But then I made the mistake of comparing AL pitching with NL pitching.  Everyone knows real pitchers take a turn with the bat.  It was stunning to see how inept the Giants made the Rangers seem at the plate.

Suddenly the heartbreaks of 1989 and 2002 are gone (not to mention the Dodgers world series titles in '81 and '88) and I can revel in the notion that the Giants have finally won it all.  And I also have to admit to being very happy that Barry Bonds was not a part of this.  Had the 2002 Giants won their world series, the presence of an obvious juicer would have been deeply unsettling.  I loved him as a player early on, but he very obviously went on the juice hard and so that whole era of player - McGwire, Canseco (1989 series anyone?), Palmeiro, Giambi, Bonds - can just fade from memory in my view.  You can't rewrite the record books - I am sure many pitchers were juicers as well - but we can all just move on.

But what to tell my kids?  My dad had to wait 60 years for his Red Sox to win, I had to wait 42 for the Giants, my sons don't even have to wait until double digits?  Ah the innocence of youth. They'll learn the true despair of being a baseball fan in due course...

Causality: Economics and Politics Edition

Kevin Hassett, via The Oregonian, makes a fundamental error of the sort that you all know will set me off: mistaking correlation for causation.  This one seems so classically wrong that I offer it as a teaching moment on this election day.  Here is the thesis:

Chances are good that the power of the federal government, squarely in the hands of Democrats the past two years, is about to become divided between the two parties. Modern American history suggests that this is the best of all worlds. With due respect to Abraham Lincoln, a house divided against itself often prospers.

Since 1970, the levers of federal government -- the White House, Senate and House of Representatives -- have been in the hands of one party, whether Republican or Democrat, 30 percent of the time. By most any measure, the U.S. economy has been healthier the other 70 percent of the time.

His evidence to support this thesis:

From 1970, median GDP has grown 3.3 percent in years of divided government (1970-1976, 1981-1992, 1995-2002, 2007- 2008), compared with 3 percent when government was unified (1977-1980, 1993-1994, 2003-2006, 2009-2010).

The effect has been more pronounced in recent years. Since 1981, when Ronald Reagan took office, median GDP has grown 3.3 percent in years in which the government was divided and 2.8 percent when government was unified. Since 1993, when Bill Clinton took office, the economy has grown 3.6 percent per year when power is split and 2.8 percent in the other times.

How about unemployment? Divided government might be exactly what today's jobless should be wishing for.

Since 1970, median unemployment has been 6.1 percent under one-party rule, 5.7 percent when both parties have some control. The spread narrows (6 percent vs. 5.8 percent) since 1981 and widens (6 percent vs. 4.9 percent) since 1993.

Equity markets have practically jumped for joy at political division. Since 1970, the Standard & Poor's 500 Index has increased at a median rate of 13.5 percent per year in divided times and 9 percent per year under one-party rule. That spread grew (14.6 percent vs. 9 percent) since 1981 and even more so since 1993 (19.5 percent vs. 9 percent).

Open and shut. Uh, except for a few inconvenient facts. First, economic policy of the type made in the Capital Building in Washington, DC has very significant lags: the effects of a new piece of legislation are generally not felt for years. Second, divided governments are often the result of an unhappy electorate, and what makes electorates the most unhappy?  Poor economic performance.  Finally, the business cycle has always been a part of the economy (even when we thought we had achieved the 'great moderation') which means that poor performance is generally followed by good performance.

Thus it is just as, or even much more, likely that the causality works the other way: poor economic performance, especially around midterm elections cause divided governments and natural business cycles causes economic improvements after such elections.  So it is the economy that causes divided governments not divided governments that cause the economy.

This time will be no different: it is virtually certain the the economy will improve in the next two years (there is no where to go but up) and it is virtually certain that the Republican party will control at least the House.  Will the fact that the Republicans control the house have any real effect on the economy in the next two years?  Not really.  The roots of the current economic downturn run from the deregulation of Reagan to the financial reforms of Clinton to the loose monetary policy of Bush and has basically nothing to do with a specific party of what branches of government they control.

Hey, it is election day: VOTE!

Monday Morning Dump

Sick today, crawling back into bed, so here are some things to amuse yourselves:

1.  From Greg Mankiw: a picture from the Jon Stewart rally.

This is right up my alley, but I can't decide if it is a defense of the Obama administration or a criticism (too slow and deliberative)?

2. Eco-nomics 1: The Oregonian reports on what is, ostensibly, a very big bet by the city on one renewable energy company and one technology - windmills (sorry, wind turbines).   I am not saying it is a bad bet, but it is a big one and it represents many, many eggs in one basket.

This at a time when Vestas is reeling from high costs and competition.  The news that it is shedding jobs in Denmark I take as a sign that soon all the manufacturing will be done in East Asia.

3. Eco-nomics 2: A nice article on some massive solar energy projects in AZ and CA that may be the last of their kind for a while thanks to expiring incentives.  But if they show that these projects can be reliable and cost effective, the incentives may have done their jobs.